$45 Billion in Industrial Projects Still Underway in Northern Canada

Between 35 and 40 percent of the total value of major industrial investment projects announced in Canada (excluding oil & gas projects)(1) involve northern regions(2).

Infrastructure in Canada’s northern regions can be expensive, accounting for 15 percent or more of total project costs. These costs are often underestimated. Although investors know full well their costs within the battery limits of their projects, their knowledge about costs outside of these are more limited. Overruns in infrastructure costs are therefore possible, and investors certainly do not need such surprises. In fact, international investors have become increasingly risk-averse in recent years, particularly as profits have declined. Major companies in Canada’s mining sector (Alcoa, ArcelorMittal, BHP, Rio Tinto, Vale and Xstrata (3)), for example, have seen profits drop from 34 percent in 2010 to 12 percent in 2012(4).

Despite all this, many projects in northern areas – particularly those with secured funding – continue to move ahead, although funds for the deployment of these projects are being released in a very gradual way.

Should this all be a major concern? Maybe not if it leads to:

Withdrawal of projects with borderline profitability;

Additional time for public administrations to assess projects, and prepare for associated socio-economic development (e.g. implementing training and housing programs, coordinating infrastructure development and cost-sharing) – key elements of sustainable and responsible development in northern regions.

After all, the lifetime of a typical mine is typically 15 to 20 years, while the returns on investments in public infrastructure involve timeframes of 50 years or more. These differences in time horizons call for difficult arbitrages between the concerned parties. It would be a pity if such negotiations were to be hurried through.

(1) Based on 80 capital investment projects of $500 million and more announced in Canada. Source : Capex-online, 2013. (2) For the purposes of this note, northern regions are defined as those with non-existent or inadequate infrastructure (i.e. roads, railways, acess to electricity grid). (3) Now known as Glencore Xstrata. (4) Operating profit margin (median). Source: annual reports.